• FB 306 Principles and Practices of Taxation

• Reference Book:
• Bangladesh Income Tax: Theory & Practice
Authors Name:
Nikhil Chandra Shil
Mohammad Zakaria Masud
Mohammad Faridul Alam
 Public Finance
• Public finance is a science that deals with the income
and expenditure of public bodies and the government
of a nation.
• Or How and in what form the government should
collect revenue and how it should spend it for the
maximum benefit of the society is a matter to be
decided by the government concern taking the various
political and economical considerations. The science
that deals with the income and expenditure of the
government and the principles, problems and policies
relating to these matters is known as public finance
 Function of Government
• The government of a country has to perform two types
of functions namely obligatory functions (e.g. defense,
maintenance of law and order situation etc) and
optional functions ( e.g. providing various facilities to
its citizens like infrastructure, health, environment etc)
• To perform all these functions adequately and
efficiently government requires funds from the public
which is the real beneficiary of the public expenditure.
Govt. raises funds from the public in the form of taxes ,
fees, penalties, sale of goods and services and also by
taking loans.
 Sources of Public Revenue
• Tax Revenue:
– Direct Tax: Income tax, corporate tax, gift tax,
wealth tax, Capital gain tax
– Indirect Tax: Custom duty, excise duty, VAT, service
Tax etc
Non Tax Revenue:
a) Fees
b) Fines and Penalties
c) Surplus from public enterprises
 Cont.
• d) Special assessment of betterment levy
• e) Grants and gifts
• f) Deficit Financing
 Importance of Public Finance
• Protection to infant industries
• Planned economic development
• Regulating consumption habits
• Reducing inequalities
• Maintaining balance of trade
• Industrial development.
• Create employment opportunities
• Maintenance of law and order situation effectively
 Definition of Tax
• The term taxation comes form latin word ‘Taxatio’ . It
means to determine the payable quantum on estimate.
Taxing authority determine the tax to be payable by the
assessee. So tax is the revenue collected by the govt. from
persons and organizations under different taxing acts.
• According to Justice Holmes, the price paid to the govt. for
living in a civilized society is the tax.
• According to Taylor, taxes are the compulsory payments to
govt. without expectation of direct benefits to the tax payer
• The above definitions make it clear that taxes are
compulsory contribution by the tax payer to the govt.
 Characteristics of Tax
• Tax is a compulsory payment to govt.
• Tax payer cannot claim direct and quid qua pro
( proportionate or equivalent) service for
payment of tax.
• It is a price paid to the govt. for living in a
civilized society
• The aim of tax collection is to finance the
government expenditure to ensure public
interest and welfare (continue)
 Characteristics of Tax
• Tax is not any fine or penalty
• It is one of the prime sources of revenue for
the government
• Tax can only be imposed by the govt. of a
country.
 Purpose or objectives of Tax
• Collection of revenue
• Reduction of inequalities in income and
wealth
• Accelerating economic growth
• Control consumption
• Protection of local industries
• Economic control and development
 Canons of Taxation
Adam Smith's canon of Taxation
• Canon of equality
• Canon of Certainty
• Canon of economy
• Canon of convenience
Some other canons which are introduced by some renowned
economists, these are
• Canon of Productivity
• Canon of simplicity
• Canon of diversity
• Canon of elasticity
 Classification of Taxes
Classification on the basis of number of taxes:
 Single Tax: When the tax system of a country
incorporates only one tax, it is called single
tax. In ancient times tax was levied on person
as poll tax or head tax.
 Multiple tax: when the tax system comprises
different types of taxes , it is called multiple
tax. At present , all the countries in the world
follow multiple tax system.
 Classification of Taxes
On the basis of impact and incidence of tax:
Direct Tax: Direct taxes are those taxes which are paid
entirely by those persons on whom they are imposed.
The burden cannot be shifted to others in case of
direct tax. Such as, income tax, land revenue tax etc.
Indirect Tax: Indirect taxes are those taxes which are
imposed on sales or purchase of any goods and
services other than personal services. Here the
burden is ultimately shifted to others. Such as, VAT,
Custom duty etc.
 Direct taxes Vs Indirect Taxes
a) The burden cannot be shifted in direct tax whereas can be
shifted incase of indirect tax.
b) Direct taxes imposed on income whereas taxes are imposed on
goods and impersonal services.
c) Direct taxes ,such as income taxes and property taxes are
generally progressive in nature since it is possible to identify
the rich and poor through the index of their income. However,
indirect tax cannot be made progressive.
d) Direct tax generally elastic whereas indirect tax is inelastic.
e) Since direct tax burden cannot be shifted, it has adverse effect
on taxpayer’s willingness to work and save, whereas indirect
tax has no adverse effect on taxpayer’s perception.
 Direct Tax
Merits:
a) Equitable since they are progressive in their rates
b) Economical since the administrative cost of collecting these
taxes is low.
c) Certain since both the taxpayer and tax authority is certain
about the rate , amount and the time regarding tax collection.
d) Direct tax ensures distributive justice since rich people pay
more tax and the poor less.
e) It creates civic consciousness among the taxpayer.
f) Since the amount is directly paid to the treasury, so there is
no scope for any leakage.
 Direct Tax
Demerits:
a) Tax evasion since no one likes to pay money to the govt.
from his income. It is human nature, so it is likely that
many persons will try to evade tax.
b) Since the burden cannot be shifted , they are
unpopular.
c) The taxes are generally payable in lump sum or even in
advance and become quite inconvenient.
d) Since direct tax burden cannot be shifted, it has adverse
effect on taxpayer’s willingness to work and save.